Some investors sold government bonds to raise cash to buy into higher-yielding company bond offerings

U.S. government bond prices fell Tuesday as investors awaited a heavy supply of corporate bonds this month, and manufacturing data showed factory activity accelerated in August.

The yield on the benchmark 10-year Treasury note rose to 2.902%, the highest since Aug. 9, from 2.853% on Friday. Yields rise as bond prices fall.

On Tuesday, some investors sold government bonds to raise cash to buy into higher-yielding company bond offerings, which could include debt sales by
Pfizer Inc.
and
Unilever,
analysts said. September tends to be a month when companies try to raise money in the bond market, as most participants in the financial markets have returned from summer holidays.

Fed funds futures indicate the probability the Federal Reserve will raise interest rates at least two more times this year were 75% late Tuesday.
Photo:
chris wattie/Reuters

Yields extended their rise after the Institute for Supply Management said Tuesday that its manufacturing index rose to 61.3 in August from 58.1 in July. Numbers above 50 indicate activity is expanding across the manufacturing sector. Economists surveyed by The Wall Street Journal had expected a 57.5 reading for August.

The unexpectedly strong reading led to a surge in investor expectations that the Federal Reserve will be able to raise interest rates at least two more times this year. Policy makers have raised rates twice this year and have penciled in two more increases.

Fed funds futures, which investors use to bet on the direction of central bank policy, indicate the probability the Fed will raise interest rates at least two more times this year were 75% late Tuesday compared with 67% a month ago.

The strength of the economy, combined with a robust labor market, makes it likely that the Fed continues to take an aggressive approach to raising interest rates, said Thomas di Galoma, head of Treasury trading and managing director at Seaport Global Holdings.

“There’s a very good chance we’re going to start seeing an upward movement in yields,” Mr. di Galoma said. “I don’t think rates can stay where they are.”